Ferrovial, S.A. (BME:FER) Shares Could Be 34% Above Their Intrinsic Value Estimate
- Ferrovial's estimated fair value is €19.68 based on 2 Stage Free Cash Flow to Equity
- Current share price of €26.37 suggests Ferrovial is potentially 34% overvalued
- Our fair value estimate is 30% lower than Ferrovial's analyst price target of €28.21
How far off is Ferrovial, S.A. (BME:FER) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
See our latest analysis for Ferrovial
Crunching The Numbers
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
|Levered FCF (€, Millions)||€624.3m||€767.0m||€1.00b||€1.33b||€1.57b||€1.78b||€1.94b||€2.07b||€2.18b||€2.27b|
|Growth Rate Estimate Source||Analyst x6||Analyst x7||Analyst x5||Analyst x1||Est @ 18.03%||Est @ 12.93%||Est @ 9.36%||Est @ 6.86%||Est @ 5.11%||Est @ 3.89%|
|Present Value (€, Millions) Discounted @ 12%||€557||€610||€712||€843||€888||€894||€872||€831||€779||€722|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €7.7b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.0%. We discount the terminal cash flows to today's value at a cost of equity of 12%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €2.3b× (1 + 1.0%) ÷ (12%– 1.0%) = €21b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €21b÷ ( 1 + 12%)10= €6.6b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €14b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €26.4, the company appears potentially overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Ferrovial as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 12%, which is based on a levered beta of 1.274. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Ferrovial
- No major strengths identified for FER.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Construction market.
- Annual earnings are forecast to grow faster than the Spanish market.
- Good value based on P/S ratio compared to estimated Fair P/S ratio.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by cash flow.
- Annual revenue is forecast to grow slower than the Spanish market.
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a premium to intrinsic value? For Ferrovial, there are three additional items you should look at:
- Risks: Case in point, we've spotted 4 warning signs for Ferrovial you should be aware of, and 1 of them is concerning.
- Future Earnings: How does FER's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every Spanish stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Ferrovial is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Ferrovial, S.A., together with its subsidiaries, develops transport infrastructure, mobility solutions, civil works, and buildings projects in Spain and internationally.
Reasonable growth potential second-rate dividend payer.